Mike Lipper’s Monday Morning Musings
The
Course to Explain Last Week
Editors: Frank
Harrison 1997-2018, Hylton Phillips-Page 2018
Understanding Your Location
Almost all the news
events of the last week are better understood if you appreciate the critical
functions created by geography. At one time a whole course on geography was
part of an early primary education, followed by a course on economic geography in
middle school. These courses were pushed out to make room for social topics better
fitting the educational establishment’s political views. No wonder so many of
the current population were misled by the actions last week.
Where the Cities Are?
As populations grew, many
benefitted from the values offered by schooling, medical services, education,
entertainment, and political practices in towns and cities. Early cities were
mostly found around strategic waterways, oceans, seas, lakes, and rivers. It’s
no coincidence downtown locations attracted merchants and others. For hundreds
of years financial and merchandise centers grew up around seaports such as New
York, Boston, London, and Tokyo. To this day, the largest city in most
countries and states remain these centers. Not surprisingly, to counterbalance
the political powers of these cities, some political forces established state
and national government sites away from the commercial centers e.g., Albany,
Annapolis, Brasilia, Canberra, Sacramento, and Washington D.C.
We are all aware The
President of the United States compromised and signed legislation into law on
Saturday. He temporarily raised the debt limit and modified the growth and make
up of appropriations. The result was only possible because DC has a different
power currency than the dollar-based currency driving the rest of the country.
The power currency as
exercised on Capitol Hill represents votes in the Senate and House, with the occasional
interaction of the Presidency and Supreme Court. If their currency was in the
commercial world, it would have been fairly easy to measure the dollars to be spent
or not to be spent. This weekend both the Democrats and Republicans are
claiming great victories. The problem is that the math is questionable, as are the
policing impacts on the agreements. Regardless of the academic debate, the
value of the concessions were too small.
There will possibly be a
longer lasting victory benefiting society in the future, as these bills were
passed by votes from “centralists” on both sides who resisted the impassioned
pleas from the extreme members of their parties. We can build on the small
progress made this week to make larger changes in the future, as long as those
in the center learn to trust and respect the centrist members of the other
party. While I have not done the analysis, my guess is that most who voted to
pass these bills came from commercial backgrounds and are used to working to
get compromises.
A Much Bigger Issue Was
Not Discussed
Whether we like it or not,
we are all globalists. Most of the threads in our clothes and some of our
favorite foods come from overseas. The producers of these goods, as well as the
militaries of our allies are paid in US dollars to protect us. We also sell a
lot of our products and services to them. The US represents roughly ¼ of world
trade. Problem is, the US dollar is the medium of exchange for ½ to 90% of
currency exchanges depending on how you measure it. The US dollar is currently the
most trusted currency. This translates into the lowest cost to buy products and
services relative to other currencies who must pay a premium for the same
purchases. This is an extraordinary privilege.
The privilege is not
granted by an authority, but by the perceived purchasing power of the dollar through
a collection of transactions each minute of each day. In general, it is assumed
the relative purchasing power is stable compared to other currencies.
Perceptions are normally
slow to change, but they can move at the speed of communication through transactors
in a 24-hour marketplace. In a microcosm of how the market can work, examine
the run on the SVB. Most of the loans and deposits were from the “silicon-valley”
venture-oriented community. Many of these companies had critical shareholders
who were active participants in the community, something the bank and
regulators did not fully appreciate. I suspect the run on that bank was started
by a few comments within this high-pressure group. The daily foreign-exchange
community is much, much larger than SVB’s critical players, although it could follow
the same communication, concentration, and contagion pattern. (There is no
single Federal Reserve Bank for currencies.)
Possible Causes
Most powerful trends initially move at glacial speeds, until they take-off in hypersonic movements. The slow deterioration essentially reflects a slow growing decline in confidence and is often a collection of small actions. Some examples are listed below:
- A poorly executed withdrawal from Afghanistan by more isolationist new leadership.
- A shared belief that China permitted COVID to escape.
- Domestic pump priming and an unwise explosion of cash generation, unleashing inflation on the world.
- A weak response to a border war, with the inability to rapidly supply US Tanks and F-16 planes for coming offensive in Ukraine.
- In addition to government management problems, US industry leaders like JP Morgan, Goldman Sachs, Apple, and even the SEC, have had management issues that led to public errors. These are not confidence builders.
Barron’s Suggest Another
Concern
In a four-page article in
this week’s Barron’s they suggest loosely regulated non-bank financial
organizations could have surprising credit issues. If you add up all the credit
and equity extended to individuals, businesses, and organizations, it is about
equal in size to the assets/liabilities of the regulated banks. Insurance
companies, retirement plans, private capital providers, family offices,
investment advisers, and brokerage firms have some narrow regulatory oversight.
However, there is no single body reviewing the impact of bailout capital on the
broader global economy.
I am not sure I want to
see a super-agency overseeing the non-bank financial sector. However, it might
be useful to have coordinated data collection and similar transaction
management principles.
Conclusion:
I am unclear as to what the
intermediate future will look like and appreciate any thoughts.
Did you miss my blog last
week? Click here to read.
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